Product Lines and Price Discrimination in Markets with Information Frictions
48 Pages Posted: 15 May 2017 Last revised: 16 Aug 2020
Date Written: May 2017
A well known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that in-formation frictions can invalidate this principle. We build a duopolistic model of second-degree price competition with information frictions in which (i) there always exists an equilibrium with overlapping qualities, whereas (ii) the equilibrium with non-overlapping qualities exists only when both information frictions and the costs of providing high quality are small enough. As a consequence, reasons other than
the attempt to soften competition should be used to explain why firms in some cases carry non-overlapping product lines.
Keywords: pricing strategy, product strategy, retail competition, search, second degree price discrimination, vertical differentiation
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